Is Housing Still a Good Investment?

The housing news is not pretty. Existing home sales fell off a cliff in July, dropping 27.2 percent to a seasonally adjusted annual rate of 3.83 million units, their lowest level in more than a decade, the National Association of Realtors (NAR) reported. The report caused the stock market to jump off the same cliff, with the Dow Jones Industrial Average trading 164 points off its open in the moments following the report. Investors fear that continued weakness in the housing market could push the economy back into a negative spiral.

Meanwhile, economists at all levels have been trash talking the concept of home buying. "If the American people are looking at the housing market to be their investment opportunity, I think they are making a mistake," Thomas Hoenig, president of Federal Reserve Bank of Kansas City, told a Congressional panel yesterday. The New York Times published a piece titled "Housing Fades As A Means To Build Wealth" that was a collection of economists predicting a long, slow slog for home values in which it could take 20 years or more for them to recover their 2005 values. And CBS MoneyWatch's own Charlie Farrell recently told readers "A house is a liability, not an asset."

Geez. As a person who owns (along with her bank) two homes, I confess to having skin in this game. But I think the outlook for housing is a little bit more nuanced than that. Here are my thoughts:

The housing numbers are skewed. The homebuyer's credit that expired in April crammed a lot of housing activity into the first four months of the year. The NAR says that for the full 2010 year, annual sales of homes are expected to reach 5 million in 2010, slightly above the 20-year average of 4.9 million.

Distinctions should be made. Housing overheated in the mid 2000s for a variety of reasons, including ridiculous 100 percent loan-to-value, interest-only, no-documentation mortgages. That's gone for good. (And I mean "good" in both the permanent and the value sense.) It was a true bubble, with people racing into the market, buying homes, and selling them at a profit months later. That's not going to happen anytime soon. But that doesn't mean that families will no longer want to live in homes at all, or that good homes bought with good mortgages don't make sense for the long haul.

A home isn't an investment, but... Hoenig's right when he says that everyday people shouldn't "invest" in housing the way house flippers were trading condos five years ago. But there's still advantage to locking in the price of an asset in a depressed market and then paying for it with other people's money over 30 years at 4.5 percent -- while you live in it. If you pay rent for 30 years, you have nothing to show for it. If you pay a mortgage, you end up with a house. That's not nothing. Even the naysayers are predicting modest appreciation of 1 to 3 percent in home values over the long haul, not a death spiral to nothing. And homeownership does offer other satisfactions: You can become a permanent part of a community, tuck your kids into their own rooms at night, and paint the walls whatever color you like.

Location, location, location. They probably remain the three most important words in real estate. Florida condos that sold for $150,000 are going for under $30,000 now, and there's enormous capacity in some overbuilt, under-desired other places like Arizona and Nevada. It's probably not a sound idea to buy a home in a one-company, has-been steel or manufacturing town, either. But in populous, growing areas? While prices and mortgage rates are this low and everyone's talking about how horrible housing is? I admit to being a contrarian, but if I had the cash, I'd be looking for a third property, and homes for my kids, too.